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Buyer Search and Price Dispersion: A Laboratory Study

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Author Info
Timothy N. Cason (Purdue Universit)
Daniel Friedman (University of California)

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Abstract

Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, and the number and kind of buyers. Equilibrium theory predicts a unified very low (very high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual transaction prices conform rather closely to the predictions, especially in treatments with many robot buyers. Individual buyer and seller behavior, however, differs systematically from the equilibrium predictions: buyers' reservation prices are biased away from the extremes and sellers' posted prices have positive autocorrelation and cross sectional correlation. Learning models can account for a portion of these deviations from equilibrium behavior.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1549.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1549

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David, Douglas D & Holt, Charles A, 1996. "Consumer Search Costs and Market Performance," Economic Inquiry, Oxford University Press, vol. 34(1), pages 133-51, January.
  2. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July. [Downloadable!] (restricted)
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    Other versions:
  4. Grether, David M. & Schwartz, Alan & Wilde, Louis L., . "Uncertainty and Shopping Behavior: An Experimental Analysis," Working Papers 511, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  5. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March. [Downloadable!] (restricted)
  6. Ed Hopkins & Robert M. Seymour, 2002. "The Stability of Price Dispersion under Seller and Consumer Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1157-1190, November. [Downloadable!] (restricted)
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  7. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June. [Downloadable!] (restricted)
  8. Severin Boreinstein & Andrea Shepard, 1996. "Dynamic Pricing in Retail Gasoline Markets," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 429-451, Autumn. [Downloadable!] (restricted)
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  9. Gastwirth, Joseph L, 1976. "On Probabilistic Models of Consumer Search for Information," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 38-50, February. [Downloadable!] (restricted)
  10. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July. [Downloadable!] (restricted)
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  12. Chen, Hsiao-Chi & Friedman, James W. & Thisse, Jacques-Francois, 1997. "Boundedly Rational Nash Equilibrium: A Probabilistic Choice Approach," Games and Economic Behavior, Elsevier, vol. 18(1), pages 32-54, January. [Downloadable!] (restricted)
  13. C. Monica Capra & Jacob K Goeree & Rosario Gomez & Charles A Holt, 2002. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 613-636, August. [Downloadable!] (restricted)
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  14. Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
  15. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michel Benaim & Josef Hofbauer & Ed Hopkins, 2005. "Learning in Games with Unstable Equilibria," Levine's Bibliography 784828000000000609, UCLA Department of Economics. [Downloadable!]
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  2. Henrik Orzen & Martin Sefton, 2006. "An Experiment on Spatial Price Competition," Discussion Papers 2006-14, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
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  3. Timothy Cason & Daniel Friedman, 2002. "A Laboratory Study of Customer Markets," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 2(1), pages 1020-1020. [Downloadable!] (restricted)
  4. Jim Engle-Warnick & Ed Hopkins, 2006. "A Simple Test of Learning Theory?," ESE Discussion Papers 153, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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  5. Martin Barner & Francesco Feri & Charles R. Plott, 2005. "On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market," Annals of Finance, Springer, vol. 1(1), pages 73-107, 01. [Downloadable!] (restricted)
  6. José Apesteguía & Martin Dufwenberg & Reinhard Selten, 2003. "Blowing the Whistle," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0303, Departamento de Economía - Universidad Pública de Navarra, revised 2003. [Downloadable!]
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  7. Cason, Timothy N. & Noussair, Charles, 2005. "A Market with Frictions in the Matching Process: An Experimental Study," Purdue University Economics Working Papers 1194, Purdue University, Department of Economics. [Downloadable!]
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  8. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," Working Papers 2004-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
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  9. Timothy N. Cason & Daniel Friedman & Ed Hopkins, 2009. "Testing the TASP: An Experimental Investigation of Learning in Games with Unstable Equilibria," ESE Discussion Papers 188, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  10. Aurora García-Gallego & Nikolaos Georgantzís & Pedro Pereira & José C. Pernías-Cerrillo, 2004. "Risk Attitudes and Internet Search Engines: Theory and Experimental Evidence," Working Papers 04-03, NET Institute, revised Oct 2004. [Downloadable!]
  11. Barner, Martin & Feri, Francesco & Plott, Charles, 2004. "On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market," Working Papers 1204, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  12. Maarten C.W. Janssen & José Luis Moraga-González & Matthijs R. Wildenbeest, 2004. "Consumer Search and Oligopolistic Pricing: An Empirical Investigation," Tinbergen Institute Discussion Papers 04-071/1, Tinbergen Institute. [Downloadable!]
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  13. James Cox & Daniel Friedman & Steven Gjerstad, 2004. "A Tractable Model of Reciprocity and Fairness," Experimental 0406001, EconWPA. [Downloadable!]
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  14. Michael R. Baye & John Morgan, 2005. "Brand and Price Advertising in Online Markets," Working Papers 2005-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
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  15. Aurora García-Gallego & Nikolaos Georgantzís & Pedro Pereira & José C. Pernías-Cerrillo, 2007. "Bias and Size Effects of Price-Comparison Search Engines: Theory and Experimental Evidence," Working Papers 20, Portuguese Competition Authority. [Downloadable!]
  16. Timothy N. Cason & Shakun Datta, 2008. "Costly Buyer Search in Laboratory Markets with Seller Advertising," Purdue University Economics Working Papers 1212, Purdue University, Department of Economics. [Downloadable!]
  17. Michael R. Baye & John Morgan, 2005. "Probabilistic Patents," Microeconomics 0504004, EconWPA. [Downloadable!]
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